Watch out for the hidden costs of franchising!

In addition to an initial franchise fee and ongoing service fee, there may be other, less obvious costs associated with setting up a franchise, all of which must be taken into account when arranging funding for your business

A number of franchise packages charge an advertising levy as well as an ongoing service fee. This is usually calculated as a percentage of sales and paid at the same time as the service fee. The existence of an advertising levy could be regarded as an advantage for a franchisee if promotion of the brand name is a very important part of the franchise’s success. If an advertising levy is made, look to see if this will be audited separately in the franchisor’s accounts so that you can see that it has indeed been used for that purpose and that alone, not that it has just disappeared into the franchisor’s pocket.

If there is no separate advertising levy, the franchisor may undertake to spend a certain proportion of the service fee each year. The other common option is that the franchisor will undertake to advertise as and when needed. With some franchises, the franchisee is expected to advertise as well as, or even instead of, the franchisor. Be careful in this instance, as this could lead to promotions that are at odds with each other – possibly resulting in the prestige of the franchise name deteriorating.

Bulk buying benefits

One apparent advantage of grouping together similar businesses can be that buying in greater bulk can mean bigger discounts and thus cheaper supplies. This applies to franchise businesses, where supplies are often an important part of the cost of an enterprise. However, some franchisors put on mark-ups that deprive the franchisees of any benefit from bulk purchasing. Make sure you ask about this when investigating different franchise businesses.

Recommendations and introductions

You also need to look out for any hidden costs of financing, which may occur if the franchisor obtains a commission on introducing you to a business providing finance or to a leasing company, if you lease equipment. This does not necessarily mean that you will get a bad deal if your franchisor helps you to arrange finance through a preferred supplier. But you should shop around to satisfy yourself that you cannot organise a more attractive deal elsewhere.

See also: Franchise fees explained for prospective franchisees

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